Investment Articles

If you are like most people, your initial reaction to the question posed by the title to this white paper is “no.” However, for many investors, the answer is “yes.” With all of the investment options available today, many investors are intimidated, confused and frustrated by the investment process. Recent studies also support the suggestion that many investors are perfect targets for investment fraud or already are victims of investment fraud. For instance,

A recent study by Schwab Institutional found that 75% of investor portfolios were unsuitable for investors given their financial situation and goals;

A recent study by CEG Worldwide concluded that over 94% of those holding themselves out as wealth managers were more product salesman than wealth manager;

The 2010 IPT Elder Investor Fraud Survey reported that investment fraud is the number crime against the elderly, affecting an estimated 7.3 million older Americans, or one out of every five senior citizens. Since that number only counts the instances of fraud actually reported, the number of victims is undoubtedly higher.

One of the problems with avoiding investment fraud is the difficulty in detecting some types of fraud due to the subtleness or complexity of the fraud itself. Another problem with detecting fraud is the personal biases and beliefs that each investor has regarding investing. The purpose of this article is to alert investors to some of the more common elements of investment fraud so that investors can prevent unnecessary investment risk and financial loss due to investment fraud.

Fraud and Cognitive Biases

The common response to investment fraud is to call for greater investor education programs. However, a recent law review article in The Elder Law Journal suggests that investor education programs may be largely ineffective due to cognitive issues such as cognitive biases and/or cognitive deficits of investors. Cognitive biases are personal beliefs that impact our decisions. Cognitive deficits are impairments in mental ability, including impairments due to aging.

In the article, “Deception, Decisions and Investor Education,” the author, suggests a model of fraud victimization, which she refers to as the “deception/decision cycle.”1 As investors are provided with investment information, they filter the information through their personal beliefs, beliefs based upon a combination of actual experience, education and first impressions. An Investor’s beliefs, or biases, may or may not be accurate, but they can become so ingrained, or “anchored,” within a person that the person resists any conflicting information.

These biases may be strengthened even further by what are known as “truth” and “authority” biases, a person’s tendency to accept a statement as true, especially when the statement comes from someone with actual or perceived authority or expertise. The individual investor, whether because of issues such as cognitive biases/deficits, the complexity of the investment information of the sheer volume of such information, may fail to recognize the deception involved in the fraud.

Asset Allocation and Cognitive Biases

A perfect example of how cognitive biases can negatively impact investment decisions is a common misperception involving asset allocation. When you mention asset allocation or diversification to most investors, they think in terms of quantity rather than quality. Consequently, a large percentage of investors have portfolios that are diversified in terms of types and numbers of holdings within the portfolio, but the portfolios are not “effectively” diversified due to the high correlation of returns, or overlap, between the investments.

Portfolios that are not “effectively” diversified are sometimes referred to as being “pseudo” diversified since they appear to be diversified, but they do not actually provide an investor with the benefits of a truly diversified portfolio. The high correlation between the investments results in an investor having less downside protection than they would have with a truly diversified portfolio.

As an example, most people would consider a portfolio consisting of a large cap fund (IWB – iShares Russell 100 Index), a small cap fund (IWM – i Shares Russell 2000 Index), an international equity fund (EFA – iShares MSCI EAFE Index) and a bond fund (AGG – iShares Barclay Aggregate Bond Index), to be diversified since it consists of four different types of funds. A review of a correlation of returns matrix for a portfolio of the four exchange traded funds (ETFs) representing the four categories over the time period 8/31/2003 to 8/31/2011 tells a different story.

IWB/IWM – 0.93 IWB/EFA – 0.91 IWB/AGG – 0.05

IWM/EFA – 0.81 IWM/EFA – (0.03) EFA/AGG – 0.11

Analyzing rolling periods of returns often provides a better picture of trends and the persistence of trends. An analysis of rolling five year periods of returns for the referenced ETFs provides the following information:

2010-06

IWB/IWM – 0.966 IWB/EFA – 0.970 IWB/AGG – (0.308)

IWM/EFA – 0.896 IWM/AGG – (0.325) EFA/AGG – (0.432)

2009-05

IWB/IWM – 0.985 IWB/EFA – 0.991 IWB/AGG – (0.282)

IWM/EFA – 0.977 IWM/AGG – (0.338) EFA/AGG – (0.340)

2008-04

IWB/IWM – 0.967 IWB/EFA – 0.999 IWB/AGG – (0.445)

IWM/EFA – 0.973 IWM/AGG – (0.518) EFA/AGG – (0.4650

The higher the matrix number, the higher the correlation of returns and performance. A negative matrix number indicates a negative correlation of returns, which means that the two investments behave differently during various market conditions.

The matrix clearly shows a high correlation of returns between the large cap and the small cap ETF, and a high, albeit varying, correlation of returns between the international ETF and the large and small cap ETFs. The matrix clearly shows a low correlation of returns between the bond ETF and the other three ETFs. An argument can be made that a portfolio consisting only of the large cap ETF (IWB) and the bond ETF (AGG) would produce similar results.

Since fees and expenses are relatively low for most ETFs, cost is not that much an issue with a portfolio of ETFs. Since many financial advisers do not use index funds or ETFs in making recommendations, the negative impact of “pseudo” diversification can be seen in a portfolio of load-based mutual funds, again representing the four asset categories used in the ETF portfolio. The mutual funds represented are American Funds Growth Fund of America (large cap equity), Oppenheimer Discovery (small cap equity), Fidelity Worldwide (international) and PIMCO Total Return (bond).

2010-06

Am/Opp – 0.922 Am/Fid – 0.981 Am/PIMCO – 0.705

Opp/Fid – 0.948 Opp/PIMCO – 0.688 Fid/PIMCO – 0.597

2009-05

Am/Opp – 0.922 Am/Fid – 0.981 Am/PIMCO – 0.519

Opp/Fid – 0.948 Opp/PIMCO – 0.636 Fid/PIMCO – 0.451

2008-04

Am/Opp – 0.893 Am/Fid – 0.989 Am/PIMCO – 0.052

Opp/Fid – 0.935 Opp/PIMCO – 0.482 Fid/PIMCO – 0.148

The data shows the correlation of returns over rolling five-year periods in order to show not only the correlation of returns, but also the trend in correlation of returns. Once again, we see the same high correlation of returns between the equity-based mutual funds, with a lower correlation of returns between the bond fund and the equity-based funds that we saw with the ETF portfolio. The results are consistent with studies that have shown an increase in correlation of returns between equity-based investments over the past decade, especially during periods of increased volatility in the markets.

The correlation of returns matrix exposes the false illusion of diversification created by the bias of assessing diversification on the quantity of funds or types of funds alone. This bias is sometimes difficult to remove, as diversification based on quantity and type seems to make sense. Unfortunately, that is exactly what unscrupulous financial advisers are relying on, as they try to exploit the “truth” and “authority ” biases.

Portfolio Optimization and Cognitive Biases

If you have had an asset allocation plan or portfolio optimization plan prepared by your financial adviser, look at the plan and see if there is anything in the plan that gives you the projected risk, return or correlation of return data on the actual investment portfolio the financial adviser recommended to you. Investors rarely see such an analysis using the investor’s actual investments, primarily because the commercial asset allocation/ portfolio optimization programs used by most financial advisers are not designed to produce such a “real world” analysis. And yet, the calculations can be done using Microsoft Excel.

In many cases this failure to provide a “real world” portfolio analysis results in recommendation-implementation gaps, often leaving investors with portfolios significantly different from the asset allocation/portfolio optimization plan provided to them by their financial adviser, especially with regard to exposure to unnecessary investment risk.

The calculations required to calculate the projected risk, return and correlation of returns statistics for an investor’s actual investment portfolio are complex. Consequently, most investors are unable to calculate the actual portfolio’s statistics themselves or to otherwise detect an investment adviser’s fraudulent behavior.

Too often an investor falls prey to the “trust” bias or the “authority” bias and just accepts the plan given to them without questioning the accuracy of the plan or the failure to provide a “real world” analysis of the actual investment portfolio that their financial adviser recommended. But you should question your financial adviser and ignore any “trust” or “authority” biases, especially since the portfolio optimizers often produce recommendations that are counterintuitive and/or contrary to existing legal standards.

Some examples may help to prove my point. Two of the most important factors in constructing a suitable investment portfolio are the investor’s risk tolerance level and the investor’s investment time horizon. With that in mind, an experiment with two popular online asset allocation calculators provides some interesting results.

The first asset allocation calculator asked about risk tolerance, but did not even ask about investment time horizon. The regulators take the basic position that anyone with an investment time horizon less than five years should generally avoid equity-based investments since they might not have enough time to recover any losses suffered in the market. With the first calculator, we ran the same set of personal investment parameters, with the only exception being that we varied the risk tolerance level in each scenario. The results are shown in Appendix A.

Two clear issues emerge regarding investor protection. First, regardless of the investor’s risk tolerance level, the calculator recommends a portfolio consisting of approximately 60% equities and 40% bonds/cash. Second, the calculator completely ignores the “low” risk tolerance entry, exposing the risk averse investor to an undesired level of investment risk due to recommended equity allocations.

With the second asset allocation calculator, information was requested on both the investor’s risk tolerance level and the investor’s investment time horizon. Once again, the same set of personal investment parameters are used in each analysis, changing only the risk tolerance level and/or the investment time horizon. The results are shown in Appendix B.

If you accept the regulators’ position regarding a minimum five-year investment time horizon for equity investments, then the second calculator’s equity allocation for the 3-5 year time horizon is questionable, as it recommends a 30% allocation to equities for the low risk investor and a 45% allocation to equities for a moderate risk investor.

Expanding the time horizon out to 5-10 years, the low risk investor get the same portfolio recommendations that the 3-5 year time horizon/moderate risk investor got, which obviously raises questions. Strangely, the moderate risk investor with the 5-10 year time horizon receives a recommendation that increases the bond allocation to 65% and lowers the equity allocation to only 45%.

Increasing the investment time horizon to 10-20 years produces basically the same recommendation for both the low risk and moderate risk investor, with the recommended equity allocation only varying by 5 percentage points. The calculator appears to overweight the investment time horizon and basically ignore the low risk investor’s preference to avoid investment risk.

The last example is just further evidence that most asset allocation/portfolio optimization software programs are highly unstable and susceptible to mistakes, so much so that they have been criticized as “estimation-error maximizers” by industry expert Richard Michaud. Investors who wish to protect their financial security would do well to replace any “truth” and/or “authority” biases with a healthy dose of skepticism and a willingness to question their financial advisers.

Investment Fees and Expenses and Cognitive Biases

Investors look to their financial advisers for advice and generally defer to any recommendations provided by their adviser. Again, this is often the results of both the “truth” and the “authority” biases. Many financial advisers limit their investment recommendations to actively managed, commission-based products, which may not be in an investor’s best interests.

The negative impact of biases grows even deeper once the impact of fees and expenses is considered. Fees and expenses on index funds and ETFs are usually low since there is little or no active management of such investments. Fees and expenses on actively managed mutual funds can vary, with some even assessing annual fees and expenses in excess of 1.0% per year. Fees and expenses are important to investors since they reduce an investor’s return.

Assume that we have two funds, Fund A and Fund B, both with relatively similar performance returns. Fund A is an index fund/ETF. Fund B is an actively managed fund that has an R-squared rating of 93, which means that approximately 93% of Fund B’s return can be attributed to the performance of a benchmark index, in this case the index represented by Fund A. However, Fund B’s annual fees and expenses are 1.0% per year, while those of Fund A are 0.25% per year.

Since most of the return of Fund B can be attributed to an index rather than the contributions of active management, why would an investor pay three times more in annual fees and expenses for Fund B? Before investing in Fund B, it is useful to see just how beneficial the active management has been and exactly what the active management is effectively costing the investor.

One commonly used method for making such assessments is known as the active expense ratio. The active expense ratio was introduced by Professor Ross Miller, a finance professor at the State University of New York at Albany. Professor Miller basically compares a fund’s R-squared rating with the excess annual fees charged by the fund to determine a fund’s “effective” annual fees and expenses.

In our example, the active expense ratio calculates to an effective annual active expense ratio fee of 3.02% for the active management of the fund, a little over 200% higher than the stated fees and expenses. For the four mutual funds in our sample portfolio, the active expense ratios were as follows.

American Funds Growth

R-Squared – 98.34

Stated Expense Ratio – 0.69%

Active Expense Ratio – 4.44%

Oppenheimer Discovery

R-Squared – 93.43

Stated Expense Ratio – 1.34%

Active Expense Ratio – 4.63%

Fidelity Worldwide

R-Squared – 97.58

Stated Expense Ratio – 0.71%

Active Expense Ratio – 3.06%

PIMCO Total Return

R-Squared – 68.43

Stated Expense Ratio – 0.56%

Active Expense Ratio – 0.53%

There are those who may argue that the active expense ratio is misleading. However, when an actively managed fund derives most of its performance from an index and an investor can obtain that same index’s performance at a much lower cost, one has to question the wisdom of reducing one’s investment returns by paying “money for nothing” and reducing one’s investment returns. Why pay three times more for essentially the same results?

And yet investors do it every day, impacted by “truth” and “authority” biases they may not even be aware of. Some investors have no choice, as their company’s retirement plan may only offer actively managed, commissioned-based investment options as a result of their plan’s fiduciary being influenced by their own “truth” and “authority” biases. Armed with the knowledge of both these biases and active expense ratios, it would not be surprising to see both plan participants and plan fiduciaries act to provide more meaningful investment options within retirement plans.

Wealth Management and Cognitive Biases

“Anchoring” is one of the strongest cognitive biases and, with regard to investing and wealth management, one of the most potentially destructive influences on wealth preservation. Anchoring can be defined as a reluctance to retreat from existing beliefs and decisions and a resistance to even consider new or opposing information.

The difficulty with addressing anchoring bias can summed up with the observation from noted economist John Maynard Keynes that “the difficulty lies not so much in developing new ideas as in escaping from the old ones” and that “worldly wisdom teaches us that it is better for reputation to fail conventionally than to succeed unconventionally.” Beliefs often become truths, regardless of whether such beliefs are valid, often resulting in unnecessary risk and financial loss.

A perfect example of the potential negative impact of anchoring can be seen in investors that adopt a buy-and-hold approach to wealth management, or, as buy-and-hold critics often refer to the strategy, the “buy, forget and regret” approach. It is interesting to note that the buy-and hold approach to wealth management is apparently derived from an ongoing misinterpretation of a famous financial study.

A 1986 study, commonly known as the Brinson-Hood-Beebower (BHB) study, concluded that approximately 94% of the variability of a portfolio’s returns was attributable to the portfolio’s asset allocation mix. The study made no representations whatsoever regarding the impact of asset allocation on a portfolio’s actual returns, only on the variability of a portfolio’s returns.

Nevertheless, financial advisers and investment companies misrepresent the study’s findings to support their buy-and-hold argument, claiming that all an investor has to do for investment success is to set up an appropriate initial asset allocation and maintain that allocation since the BHB study proved that asset allocation determines 94% of an investor’s returns. The problem is that many investors have read or heard this mantra so often that they have fallen prey to the “truth” and “authority” biases and the misrepresentations are now firmly anchored into their personal beliefs.

It is interesting to note that the buy-and-hold approach is not derived from the works of the early pioneers of wealth management, Nobel laureates Dr. Harry Markowitz, the father of Modern Portfolio Theory, and Dr. William Sharpe. In fact, Dr, Sharpe has recently stated that investors should change their asset allocation in response to changes in market values. A recent study by asset allocation expert Roger Ibbotson has rebuffed the buy-and-hold strategy, stating that active management and asset allocation have about the same impact on a portfolio’s performance.

There are many investment professionals who would argue that the buy-and-hold approach is fundamentally sound and does not constitute investment fraud. These professionals usually claim that anything other than a buy-and-hold approach, with an occasional rebalancing to restore the original asset allocation parameters, constitutes market timing, which is both costly and ineffective.

From a legal perspective, what buy-and-hold advocates fail to realize is that the buy-and-hold approach completely ignores the proven cyclical nature of the market and t the Prudent Investor Act, whose guidelines which are often used by regulatory bodies and the courts in determining questions of fraud and prudent fiduciary conduct. The Prudent Investor Act clearly states that a fiduciary should make changes in an investment portfolio when changes in the market or economy dictate such changes are necessary in order to protect the portfolio against unnecessary risk and losses.

The classic definition of market timing involves having all of one’s assets either in the market or out of the market. The potential tax implications and the difficulty in perfectly timing the stock make such a strategy practically impossible. Reallocating some of one’s resources to reduce risk exposure is not market timing, but smart, defensive investing.

Smart investors would do well to heed the advice of noted investor Ben Graham, who warned that “the essence of investment management is the management of risks, not the management of returns. Well managed portfolios start with this precept.” Various studies support Graham’s postion, with such studies documenting the fact that avoiding losses has a much greater impact than missing potential returns.

Many investors suffered unnecessary investment losses during the recent 2000-2002 and 2008 bear markets due to their cognitive biases regarding the buy-and-hold approach to investing and their refusal to objectively consider other investment approaches. Unfortunately, these same investors will likely continue to suffer unnecessary investment losses unless and until they recognize their cognitive biases and objectively examine their investment strategy. As George Santayana pointed out, those who cannot remember the past are condemned to repeat it.”

Conclusion

Investment fraud is a pervasive problem. While various statistics are often cited as evidence of the problem, the truth is that such numbers are only a small percentage of the actual cases of investment fraud, as many cases go unreported and many victims of investment fraud are unaware that they are victims due to the subtlety or complexity of the fraud itself.

An emerging theory of investment fraud is that investors are susceptible to investment fraud due to cognitive biases and/or cognitive deficits that impair their ability to properly analyze investment situations and the recommendations of their financial advisers. It is imperative that investors become aware of and overcome potentially harmful personal biases, such as “truth” bias, “authority” bias and anchoring, in order to properly analyze investment options and better protect their financial security.

© Copyright 2011, InvestSense, LLC. All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional adviser should be sought.

Notes

1. Jayne W. Barnard, “Deceptions, Decisions and Investor Education,” Elder Law Journal, Vol. 17, No. 2 (2010), 201.

APPENDIX A

Low Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: Low > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation > Large Cap Equity – 23%, Midcap Equity – 13%, Small Cap Equity – 9%, Foreign Equity – 14%, Bonds – 23%, Municipal Bonds – 18%, Cash – 13%

Moderate Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: Moderate > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation > Large Cap Equity – 21%, Midcap Equity – 14%, Small Cap Equity – 10%, Foreign Equity – 16%, Bonds – 26%, Municipal Bonds – 18%, Cash – 0%

High Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: High > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation>Large Cap Equity – 20%, Midcap Equity – 16%, Small Cap Equity – 13%, Foreign Equity – 17%, Bonds – 24%, Municipal Bonds – 0%, Cash – 10%

APPENDIX B

3-5 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 70%, Large Cap Equity – 15%, Small Cap Equity – 5%, Foreign Equity – 10%

Moderate Risk Tolerance: Bonds – 50%, Large Cap Equity – 25%, Small Cap Equity – 10%, Foreign Equity – 15%

High Risk Tolerance: Bonds – 60%, Large Cap Equity – 20%, Small Cap Equity – 10%, Foreign Equity – 10%

5-10 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 50%, Large Cap Equity – 25%, Small Cap Equity – 10%, Foreign Equity – 15%

Moderate Risk Tolerance: Bonds – 65%, Large Cap Equity – 20%, Small Cap Equity – 5%, Foreign Equity – 10%

High Risk Tolerance: Bonds – 40%, Large Cap Equity – 30%, Small Cap Equity – ]15%, Foreign Equity – 15%

10-20 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 30%, Large Cap Equity – 30%, Small Cap Equity – 20%, Foreign Equity – 20%

Moderate Risk Tolerance:Bonds – 25%, Large Cap Equity – 35%, Small Cap Equity – 20%, Foreign Equity – 20%

High Risk Tolerance: Bonds – 20%, Large Cap Equity – 40%, Small Cap Equity -20%, Foreign Equity – 20%

James W, Watkins, III is an attorney, a CFP® professional and an Accredited Wealth Management Adviser®. His areas of expertise include wealth preservation, asset protection, investment fraud and fiduciary law. He is CEO of InvestSense, LLC, a registered investment adviser firm located in Atlanta, Georgia. For additional articles and information, visit the company’s website, http://www.investsense.com. Mr. Watkins can be contacted at tawj3@yahoo.com, and followed on LinkedIn and on Twitter @InvestSense.

The abundance of investment products and investment information available today can be intimidating and confusing to many investors, both novice and professional. Over my twenty-plus years as an attorney and investment adviser, I have tried to help others focus on some of the critical information in order to avoid unnecessary investment losses, to help level the playing field against some of the ne’er-do-well that continue to defraud the public and plague the financial services industry.

Speaking with a colleague the other day, he commented on the fact that a lot of the important information we get through trade publications such as InvestmentNews rarely seem to get mentioned in the mainstream media and press. And when we mention such information to clients, they often comment on how useful such information would have been.

After my conversation with my colleague, I started thinking about some of the “inside” information I have shared with my clients that produced the most reaction and appreciation. In hindsight, I think three numbers have stood out the most to me and my clients. The three numbers every investor should know are as follows:

1. “75″ – The number “75″ is actually important for two reasons. First, a study by Schwab Institutional found that approximately 75% of investor portfolios were poorly structured and unsuitable for their investors given the investors’ financial needs and goals. I believe that this is primarily a result of the fact that (1) stockbrokers are not required to act in a client’s best interests, and (2) investors are often mislead by portfolios that appear to be diversified because they hold a number of different types of investments, but such portfolios are often not truly, effectively diversified.

The second reason that the number “75″ is important is because research and history have shown that approximately two-third, or 75%, of stocks follow the general trend of the market. This simply supports the popular Wall Street adage, “don’t confuse brains with a bull market.”

2. “94″ – While there are many firms and individuals in the financial services industry calling themselves wealth managers, a study by CEG Worldwide, a well-respected financial services consulting firm, concluded that only 94% of those calling themselves wealth managers or claiming to provide wealth management services failed to meet the criteria used to qualify as wealth managers. The criteria that CEG used in their study to determine true wealth management was based primarily on advisers who practiced wealth management as a process as compared to those who simply used “wealth management” as a marketing ploy to push product. This is the same criteria that investors and fiduciaries should use in choosing a financial advisor to work with.

Secondly, one expert has suggested that this number (OK, actually 93.6, which rounded off is 94), and the study that produced it may have caused more damage to investors than any other number/study. The number comes from the famous 1986 Brinson, Hood and Beebower (BHB) study that stated that 93.6% of the variation of a portfolio’s returns could be explained by the portfolio’s asset allocation.

The study did not say that asset allocation explained 93.6% of the portfolio’s actual returns, but rather the variation of the portfolio’s returns. Nevertheless, dishonest brokers and advisers misrepresented, and still do misrepresent, the BHB study’s findings to convince investors to choose an asset allocation and rigidly adhere to it, despite the proven cyclical nature of the markets. This is the mantra of the” buy and hold” approach to investing, an approach that some have suggested is better described as the “buy, hold and regret” approach to investing. Just ask investors how well that worked during the 2000-2002 and 2008 bear markets.

Unfortunately, given the current budget issues that exist at the time I write this post, static asset allocators may soon get yet another costly education. Dr. William Sharpe, a Nobel laureate for his work in the area of investment management, now stresses the need to be proactive and adjust portfolio allocations when changes in the economy and/or the market dictate such moves.

3. Zero – This number represents the number of variable annuities (VA) and equity indexed annuities (EIA) an investor should own. As a former compliance officer and a current securities attorney I have heard all the convoluted and conniving justifications for these atrocities. I have written posts and articles warning investors about these products. While there may be a few limited instances where they may make sense, such as wealth preservation for high net worth investors, the way they are marketed to the masses is extremely questionable.

One Wall Street Journal article reported that variable annuity salesmen were told to treat potential annuity clients as “blind twelve-year-old,” and to “put a pitchfork in their chests,” and provide questionable responses to potential client’s questions. VA salesmen and VA advertisements often tout that by purchasing a VA the investor will never run out of money.

What is often not made clear that in order to guarantee that lifetime stream of money, you give up all rights to the money invested in the VA. Once you annuitize your VA, the balance goes to the insurance company once you die, not to your heirs. In most cases the insurance company offers various choices for payout, such as joint survivor and a guaranteed period, but these options generally result in lower periodic payouts and, in some cases, additional fees.

One of the most onerous aspects of VAs is the excessive fees that most VAs charge, especially with regard to the so-called death benefit. VAs typically guarantee that in the event the VA owner dies with out having annuitized the VA, the owner’s heirs will receive either the accumulated value of the VA at the time of the owner’s death or the amount of the owner’s actual investment in the VA, whichever is greater. So the VA issuer is only insuring the amount that the VA owner actually puts in the VA.

Meanwhile, the insurance company assesses the VA’s annual death benefit fee not on the basis of their actual legal obligation, which is the amount of the VA owner’s actual investment, but rather on the accumulated value of the VA. One study estimated that the actual expense of the annual was approximately 0.10-0.12, but that the insurance companies often charged approximately 1.50%, or approximately fifteen times the estimated value, resulting in a nice windfall for the insurance company. The additional fee also cost a VA investor by reducing this investment return.

EIAs are also problematic. EIAs are generally sold with the pitch that investors can earn the same return that the stock market does, with the guarantee that even if the market is down, the EIA investor is guaranteed a minimum return. What many investors are told is that the potential return is usually capped at a relatively low number, say 10%, and then is reduced even more by a “participation rate,” usually an additional 2-3% reduction. In short, the EIA investor is looking at annual rate of between 2-7%. If the market is up 20% or more for the year, just who is getting the benefit of the excess over the investor’s return?

There may be other significant numbers that I have omitted. However, investors and fiduciaries that remember these numbers and the reasons for their significance will be in a better position to protect both their financial security and/or their clients’ financial security.

James W. Watkins, III is an attorney, a CFP professional and an Accredited Wealth Management Adviser. His areas of expertise include wealth management, wealth preservation, wealth protection and fiduciary law. He is CEO of InvestSense, LLC, a registered investment adviser firm located in Atlanta, Georgia. For additional articles and information, visit http://www.investsense.com. Mr. Watkins can be contacted at tawj3@yahoo.com, and followed on Twitter @InvestSense.

Venturing into the world of investments can be simultaneously rewarding and overwhelming. These days there are so many wide and varied opportunities for investment, from gold or other precious metals to stocks and bonds or restaurant ventures. The list can go on and on. It is important to consider your interests for investments as well as how much money to invest. Investing can be short term in buying a few shares of a company in the stock market and trading them, buying more and trading again in order to earn a profit. It can be investing long term in a company or endeavor or in stocks and bonds.

When setting on the road to investing, there are many tips and tricks that can help. Here are a few things to keep in mind when investing:

Research- this is a big one. Research thoroughly the intended area of investment. Use the Internet to conduct in depth research. Facts and figures as well as consumer experiences can all be found online. Contact professionals in the field, many will consult over the phone or via email free of charge for the first talk. Experienced investors are a valuable resource to garner investment information from. Find out their niche, why they chose it and the successes to be found. Most investors are willing to share tips and tricks, just not reveal all their information.

Update- even after researching and deciding upon one or more avenues of investment, continue to stay up to date on the news and information about the chose areas of investment. Stay in the know about the changes and evolvements that are always going on. The best way to do this is to subscribe to regular informational updates via email or websites that have live or short term streaming information.

Diversify- once you have set upon the road of investing, diversification is important in order to keep the level of risk to your overall portfolio low. By investing in several places instead of simply one, when one thing is low, likely the others will be holding steady or growing. This keeps you from potentially losing out on everything if things are spread out.

Investments are a great way to support the economy while securing and furthering your own finances at the same time. Those who do not wish to risk money can invest in secure options while others can play the game if they so choose.For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Sean Johnson is an Investment Advisor for http://www.inquest.biz an Investment Referral Service for investors requesting information on specific investments.

Everyone needs a system of accounting and keeping track of expenses and income. This is no different for investors. There are many options available for those who are trying to keep track of their investments such as using balance sheet accounting to keep on top of the ups and downs of the investments. This is a simple way to do your checks and balances that lays out all of the information at a glance. While there are many styles of this type of accounting you can be sure that it is still very accessible and can be the easy way to manage your investment information.

If you are not interested in using balance sheet accounting to keep track of your investments you may want to consider a software program that can really help you keep on top of the success of your investment portfolio. Some of these great programs can give you prodding when there are things that need to be done on your investment portfolio. They can even tell you when your investments are dropping below a level that is comfortable for you after you set up some parameters. These are a great way to let technology help you stay focused on your goals.

You can also bypass using balance sheet accounting by hiring a professional to help you work through the accounting process of your investment portfolio. This is a great option because it helps relieve a great deal of the pressure of constantly having to stay on top of the day to day ups and downs of the investment process. In addition, the professional can advise you of potential issues on the horizon and what you can do about minimizing any losses you may be in danger of experiencing. This is a nice way to make sure you are not missing any red flags on the investments.

Whether you choose to use a balance sheet accounting system, a computer software aid or the assistance of a professional, you want to be sure to keep tabs on your investments. This will enable you to make changes before you have issues when there are problems headed your way. You also want to be aware of what you are investing and how much you can expect in returns. You want to be sure not to allow this information to take over your daily life. Constantly looking at your investments can be overwhelming. For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Sean Johnson is an Investment Advisor for http://www.inquest.biz an Investment Referral Service for investors requesting information on specific investments.

Online investing has become a popular tool for both seasoned and newbie investors. Most of the major investment companies now offer investors the opportunity to buy, sell, and trade all types of investment products from the comfort of home.

Investors can participate in online investing 24 hours a day, 7 days a week from nearly any location in the world. Newbie investors have the opportunity to learn all facets of investing by viewing webinars presented on company websites or interacting with other investors through community forums.

Members can open accounts, deposit funds into existing accounts, engage in trading activities, and even purchase real estate. However, before becoming active in this financial arena, participants must take time to conduct research and understand the pros and cons of this investing practice.

Individuals should familiarize their self with the different types of investment products to determine which ones will help them reach their financial goals. Investors should research the anticipated return on investment, earned interest, and tax ramifications. It is also important to become familiar with each investment company and thoroughly review terms of service and assessed fees.

Individuals who have never purchased investment products often find online investing somewhat intimidating. Those who are just starting out should consider working with investment firms who have brick-and-mortar businesses where they can meet agents face-to-face and obtain personal consultations.

Perhaps the biggest concern people have regarding online investing is security. While this is a legitimate concern, it is important to realize that any information transferred online can be hacked. From banks to hospitals and company websites to government agencies, nothing is 100-percent hack-proof. However, reputable investment companies go to great lengths to protect their clients’ personal information. The chance of having investment information stolen is miniscule compared to other types of online transactions.

One of the most trustworthy sources for learning about investment products and security protection is InvestingOnline.org. Visitors can utilize the investing simulator to learn about the different types of investment tools. This website allows visitors to purchase, sell and trade virtual stocks to become familiar with how the process works. Investing Online offers an entire section regarding how to spot investment scams, along with a multitude of security tips and recommendations.

After conducting research and determining which products are best suited for personal goals, it’s time to locate a good investment company. Some of the more popular companies include: Merrill Lynch, Charles Schwab, Fidelity Investments, Vanguard, Edward Jones, and BNY Mellon. Corporate websites often include article libraries, audio and video webinars, and interactive tools which help clients become familiar with the company and services offered. Most investment firms offer complimentary consultations to new clients to help create a profitable financial portfolio. Consultations can take place in person, by phone, or via instant message systems.

There is no one-size-fits-all approach to investing. Some people choose one product and incorporate additional products over the course of time. Some investors prefer to utilize two or more investment firms or purchase multiple products to avoid placing all their financial eggs in one basket.

The most common investment products include: treasury bonds, stocks and options, certificates of deposit (CDs), mutual funds, life insurance annuities, and tax-deferred income annuities. Investing in real estate can be a profitable choice for those familiar with the market. In addition to buying physical property, investors can also purchase real estate stock or cash flow notes such as seller carry back trust deeds.

Online investing has opened the doors for people of all ages and financial status to capitalize on a variety of investment products. Those who take time to learn the process and understand which products offer the highest return on investment can build a strong portfolio that can provide emergency funds, pay for future expenses, or create a retirement nest egg.

Learn how to harness the power of online investing from author and real estate investor, Simon Volkov. His website provides a comprehensive article library regarding the various types of investment products, along with tips and resources for earning the highest profit. Discover which investment products are best suited for your needs by visiting www.SimonVolkov.com.

When it comes to getting into investing, many people find themselves hesitant, for a number of reasons. When asked, the number one reason people state for not wanting to invest their money is lack of knowledge.

Fortunately for these people, investing isn’t too complex to get into, and as many confident investors can tell you, it’s just a matter of getting started. Once you have tried a few investments that are good for beginners, investment knowledge begins coming quickly. There are a number of investment opportunities that are ideal for first time investors, and first timers might be surprised to learn that they are already investing and don’t even know it.

Interest bearing savings accounts are one type of investment that many people already have. These types of accounts are fairly simple – they pay a % return on the amount of money in the account, depending on the bank. As many people already have interest bearing savings accounts, a good type of investment to start out with is a certificate of deposit, or CD. Interest rates on CDs are typically higher than on savings accounts, and can be purchased at most any bank. One benefit of a CD is that you can choose the duration of the investment, and then collect interest until the CD reaches maturity. Despite the recent furore regarding the banks, they remain a safe place to put your money, but of course the paltry percentages being offered at the time of writing are often outstripped by rates of inflation. So if you reframe any savings accounts that you have as investments, they start looking like a poor choice.

Money market funds are often a good option for first time investors. These work in much the same way as interest bearing saving accounts, and have higher interest payouts. Like savings account, they are short term, and are a good alternative for first time investors who don’t want their money tied up in a CD.

Once you have tried out one or all of these types of investments, you’ll quickly realize how easy investing can be. From here, a popular option is to meet with a broker and discuss more complex investing options. As you continue learning, a good tip of advice is to maintain a low risk tolerance. A low risk tolerance simply means that the investor sticks to investment opportunities that are low risk, which is good for first time investors just getting started.

You should also realize that learning investment methods yourself is much easier than you may think and puts you in charge of your future. Try and make sure the information you’re getting comes from reliable – proven to be reliable – source. Anybody offering you investment information should have a publicly proven track record of making money from investing, and not just from writing about it!

Andy Markus is an online trader who is busy studying the methods of acclaimed trading guru Mark Shipman using his http://www.TheAutonomousMillionaire.com course.

Most people want to know what the best investment is for them. What investment information should they be aware of and which investment options fit their needs? Here’s how to get your ducks in a row before you invest money.

Many people go to free personal investing seminars looking for investment information. They want to invest money, but don’t even know what their investment options are. What do they get? Maybe they get a free lunch; and likely they get a sales presentation.

When I was a financial planner I designed my personal investing seminars to be different because most of the ones I had been to turned me off. I didn’t try to sell a specific financial product as being the best investment for everyone present. Instead I emphasized general basic investment information like: what your basic investment options are, and how to select the best investment for YOU.

Before you invest money consider 5 things, in this order: liquidity, safety, growth, income, and tax advantages. How import is each to you, on a scale of 1 to 10? You can’t have it all, because there is no perfect investment. But if you’re honest with yourself you can eliminate investment options that are not appropriate for you in your search for your best investment. Here’s an example of how this game of elimination works.

Let’s say that you want to invest money for retirement, and you plan to retire in 10 or more years. You don’t need high liquidity (quick and easy access to your money) because you expect to keep this money working for years. You are willing to give up high safety in return for growth and the potential for higher investment returns. Receiving interest income is not important, but if you could get a tax break you certainly would not pass it up.

What investment options can you eliminate, and what might be your best investment? You can eliminate: savings accounts, CDs, money market accounts, Treasury securities, and other investments designed to pay interest income with a high degree of safety. What’s your best investment?

Opening an IRA with a mutual fund company could offer you growth potential and tax advantages.

On the other hand, if you need ready access to your money and/or interest income you don’t need a mutual fund IRA; you need the likes of the investment options we just eliminated above.

The next time you consider an investment rank it by the 5 criteria above. That’s the investment information you need to find an investment that best fits you.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

What are Junk Silver coins and why are they a great investment? Junk silver coins are simply U.S. coins that contain real silver and have been in general circulation at some point. The name “junk” come from coin collectors, and it means that the coins have no collectible value. Despite the less than attractive name, these coins are one of the best ways available for individual investors to own silver. The reason is that these coins have several unique advantages over other ways of investing in silver.

First and foremost, the U.S. government certifies the silver content of these coins. That means that if you have a pre-1964 dime, you can be confident that it contains 90$ silver. Similarly, if you find a silver quarter from the right issue, you can be certain of its silver content.

Because of this, these coins are easily recognized, and highly liquid all over the world. That makes them a great way to store and transport value for anyone who is concerned about the current economic climate.

Another advantage is the coins’ small size makes it easy to conduct transactions with them even under the worst economic circumstances. In that way, they are much easier to work with than silver bars or other silver forms of silver bullion.

Lastly, these coins are legal tender in the U.S. That means they can be spent for their face value. In other words, they can never go to zero, even if the price of silver completely collapses. Few other investments can make this claim.

Nowadays many people are concerned about inflation and the national debt. Owning precious metals is one of the best ways to protect yourself against this, and circulated silver coins are one of the most convenient ways to do it.

Ami Raju writes for http://junksilvertrader.com/ – a resource for investing in junk silver coins, with prices, investment information, and more.